Supporting Clean Energy Finance in the Asia Pacific · PDF fileSupporting Clean Energy Finance...
Transcript of Supporting Clean Energy Finance in the Asia Pacific · PDF fileSupporting Clean Energy Finance...
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Supporting Clean Energy Finance in the Asia Pacific
Region
Innovative Energy FinancingCSD 15 Learning Center
1 May 2007Martin Endelman
Principal Guarantees and Syndications specialistOffice of Cofinancing Operations
Asian Development Bank
Topics
ADB’s Clean Energy and Environment ProgramExamples of Financing Structures
Risk-sharing mechanisms Subordinated contingent loansPrepayments for Carbon CreditsCarbon delivery guarantees
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Asian Development Bank
The region’s multilateral development bank, established in 1966 A partnership for development, with
67 members (48 regional, 19 nonregional)Receives two-thirds of its capital and staff from the Asia and Pacific region “AAA” ratedEnjoys Charter privileges and immunities
Energy Policy
ADB’s 2000 Energy Policy identifies four operational priorities:
Poverty reductionPromoting private sector involvementPromoting regional cooperationAddressing regional and global environmental impacts
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Energy Policy
But a current review of the Energy Policyurges greater focus on
energy security climate change
supports “clean energy” (CE) projects which
improve energy efficiency (EE)use indigenous forms of renewable energy (RE)
Energy Policy
It also recognizes that ADB is good at supporting large public sector infrastructure projects
needing long term, hard currency financeBut not so good at financing smaller CE type projects
needing carefully structured short to medium-term finance in local currency
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Energy Policy
… hence acknowledging that most CE projectsare best undertaken by or through the private sector in our developing member countries
Examples of Financing Structures
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1st Risk-sharing mechanism (RSM) -to help local financiers support smaller Clean Energy projects
Risk-sharing mechanism
Through the proposed RSM, ADB wouldseek out and work with a number of commercial banks and other financial institutions (FIs)
to develop, adopt and/or expand their CE portfolios
share an agreed amount or type of risk associated with each guaranteed CE portfolio
through a risk sharing agreement
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Risk-sharing mechanism
RSMs would supportsovereign, subsovereign, SOE, PPP and nonsovereign borrowersa wide variety of RE, EE and related CE projectsa large number of small transactions, which ADB cannot directly help
$100,000 to $3 million
Risk-sharing mechanism
Each FI acts as the aggregatorleverages its balance sheet
by sharing risk with ADB, a “AAA” creditbuilds its CE “book”
and experience with CE projects provides loans, leases, or other forms of finance
in local currency
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Risk-sharing mechanism
With the benefit of the Clean Energy Financing Partnership Facility (CEFPF) donor funds ADB might also cover a portion of the “first loss” suffered by the FIIf available, this would be a strong motivator for FIs to build CE portfolios
in new more challenging markets
CEFPFBacks ADB for an agreed percentage and or 1st loss
Local Financial Institution
Loan/lease in major or local currency
ADBRisk-sharing agreement
guarantees say 50% of loan and or 1st loss amount
Takes a share of risk
on ESCO and End-user
ESCOBorrower
Energy End-user
Industrial or commercial
Energy Per. Contract
w/ performance guarantee
EXAMPLE RSM supporting of Energy
Performance Contracts
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Local Financial Institution
Local Financial Institution
CEFPFBacks ADB for an agreed percentage and or 1st loss
ESCOEnergy End-user
Borrower
Energy Per. Contract
ADBRisk-sharing agreement
Takes a share of risk
on ESCO and End-user
guarantees say 50% loan and or 1st loss amount
Local Financial Institution
Loan/lease in major or local currency
w/ performance guarantee
EXAMPLE RSM supporting of Energy
Performance Contracts
Risk-sharing mechanism
Target CE projects Supply-sideSmaller off-grid renewable energy
wind Bio-mass and Bio-gasSmall, mini and micro-hydroSolar heating and photovoltaic
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Risk-sharing mechanism
Target CE projects Demand-sideIndustrial energy efficiency
including process efficiencyBuilding end-use efficiency
commercial, governmental, and residential sectors
Municipal infrastructurestreet lighting, water, waste and sewage treatment and pumping
Irrigation
2nd Subordinated contingent loans -to facilitate technology deployment
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Subordinated contingent loans
To lower capital costs and risk associated with deploying new technologies
thus mobilizing senior debt or other public investment
ADB might provide a combination of grants and contingent loans to CE projects
on a subordinated basis repayable only under certain conditions
Eligible technologieswould offer large clean energy benefits and be technically proven but are still in the commercialization process, where
perceived risks and/or higher costs prevent their use in particular markets and deployment by early adopters will provide high demonstration value
Subordinated contingent loans
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Subordinated contingent loans
Grants and loanswould be available when there is clear a justification and rationale for such “subsidies”might come from
ADB’s own and or other resources CEFPF donor funds
Subordinated contingent loans
0
100
200
300
400
500
600
Years
Rep
aym
ent
Equity Senior Debt
EXAMPLE$400m sub-critical power plant
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Subordinated contingent loans
0
100
200
300
400
500
600
Years
Rep
aym
ent
Equity Subordinated Loan Senior Debt
EXAMPLE$490m super critical power plant, with $90m sub. loan
… but repayable only after senior debt is fully
serviced
Subordinated contingent loans
Target CE projects Supply-side • New clean coal power generation
technologies • super and ultra super critical• integrated gasification combined cycle• carbon capture
Larger grid-connected wind farms
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Subordinated contingent loans
Target CE projects Demand-sideLarger process efficiency projects in energy intensive industries
cement fertilizeriron and steel
3rd Prepayments for Carbon Credits –generated by CDM projects, through the ADB Carbon Market Initiative (CMI) and the Asia Pacific Carbon Fund
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Industrialized Country(Annex B)
Entity AGHG Emissions
Developing Country(non-Annex B)
Entity B
Finance
Technology
(Capacity Building)
CDM Concept$50-400/tCO2eabatement cost
$0.5-20/tCO2eabatement cost
Carbon Credits
(=GHG Emission rights)
Project ActivityEmission Reduction
Riskand Time
Industrialized Country(Annex B)
Entity AGHG Emissions
Developing Country(non-Annex B)
Entity BProject Activity
Emission Reduction
Payment
CDM Reality
Carbon Credits
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Asia Pacific Carbon Fund
Cofinances projects alongside ADB Can secure 25%-50% of future carbon credits Fills a critical project financing gap
With upfront payment using a fair discount rate
Fund size$80 million - $200 million
Year: 2006 07 08 09 10 11 12
Commercial
Standard“Pay-on-Delivery”
Funds
CERs
Asia PacificCarbon Fund
$
Financing Project phase:
$CERs
Timing of Fund Investments
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Methane Capture and UtilizationCoalmine methaneMunicipal waste management (landfill methane)
Energy EfficiencyIndustrial technologySupply-side efficiency (e.g. upgrade of generation equipment)
Renewable EnergyBiomass energySmall to mid-scale run-of-river hydropowerWind powerGeothermal power
Target CDM Projects
4th Carbon delivery guarantees –to help CDM and other GHG mitigation projects directly access commercial finance
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Carbon delivery guarantees
For CE projects eligible for support under the CDM,
and possibly other mechanisms that evolve in the future
additional finance can come from the pre-sale of some or all of the carbon credits generated
Carbon delivery guarantees
This could be in the form of Prepaymentsfrom the Asia Pacific Carbon Fund or other carbon credit funds or buyerswho can pay for carbon credits under emission reduction purchase agreements (ERPAs)
in advanceapplying a fair discount rate to the ‘pay-on-delivery” price
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Carbon delivery guarantees
… or in the form of carbon financefrom commercial or specialists project financiers secured by “bankable” ERPAs and the cash flows they generate
when carbon credits are delivered in the future
Carbon delivery guarantees
To mobilize such finance and to achieve the best possible terms
minimize the margin or discount rate used to compensate for risk
certain risks might be mitigated by carbon delivery guarantees & insurancewhich are provided by
Private sector insurersExport credit agenciesMDBs, like ADB and MIGA
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Carbon delivery guarantees
Project Risk, including Commercial risks
project completionnew technologyoperator performance supply and off takeavailability of other finance to complete the projectinsolvency
Natural force majeure risksstorms, wind, floods or droughts
Carbon delivery guarantees
Country Risk, including Export/import license cancellation or embargo
such as “export” of CERS Confiscation, breach of contractPolitical violence
War, terrorism and sabotage Community or NGO opposition
causing delays to project implementation
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Carbon delivery guarantees
Carbon Market Risk, includingERPA documentation Legal title to CERsMark to market riskKyoto Protocol Risks
Project rejected by CDM Executive Boardbasis for Project assessment and approval changes GHGs not properly monitored and accounted
Carbon Financier
Provides loan secured by ERPA and Carbon Del. Guarantee
Carbon Del. Guarantee
Insurer/Guarantor
Takes % of Buyer Risk Country Risk Project Risk
CDM ProjectBorrower
Carbon Credit Buyer
ERPA
Pays for CERs on delivery
EXAMPLE Carbon Delivery Guarantee for Carbon Finance
MDBsECAsReinsurers
Reinsure certain risks
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Insurer/Guarantor
Carbon Del. Guarantee
Takes % of Country Risk Project Risk
CDM ProjectBorrower
Carbon Credit Buyer
ERPA
EXAMPLE Carbon Delivery Guarantee for Carbon Credit
Buyer
MDBsECAsReinsurers
Reinsure certain risks
Prepayment
For further information, please contact:
Samuel TumiwaSenior Energy SpecialistRegional and Sustainable Development DepartmentEmail: [email protected]
Martin EndelmanPrincipal Guarantees and Syndications SpecialistOffice of Cofinancing OperationsEmail: [email protected]
or visit our website at:www.adb.org/Cofinancingwww.adb.org/clean-energy